Category Archives: student debt

You’ll recall that the UK had an election in early May in which the Conservative Party, contrary to most polling, won a majority of seats, and thus was able to form a government without need for a coalition. On July 8, the new government delivered its first budget, which contained a lot of policies that – to put it mildly – had not exactly been fully outlined to the electorate eight weeks earlier. In student aid, what that meant was the outright abolition of maintenance grants, and their replacement with student loans of slightly higher value.

Rewind a little bit here for some history: before 1992, the UK was a free-tuition, all-grant system. In that year a student loan program was set up because the government felt it couldn’t continue to increase maintenance grants. In 1998, means-tested tuition of up to £1,000 was introduced, and maintenance grants were abolished in favour of an all-loans system. After 2006, when tuition was effectively hiked to £3,000, maintenance grants of up to £2,900 were re-introduced, alongside loans for fees, and maintenance loans of up to (roughly) £4,000 pounds (amounts were indexed). The maintenance loan and grant system remained unchanged when fees were effectively raised to £9,000 in 2012 – that is, unchanged until now.

With means-tested grants being replaced by loans, and those loans being placed on top of the £27,000 (C$54,000) in fees that a three-year degree will bring, there are a lot of lurid headlines (like this one) about how the poorest students are now facing the largest debts – possibly over £52,000 (C$104,000) at the end of their education. That figure is, strictly speaking, accurate – but it doesn’t quite capture the weirdness of what’s going on.

As I explained back here, there’s a certain fantasy element to student loans in England. Repayment occurs in strict income-contingent fashion, with no payments on the first £21,000 (C$42,000) of income, and 9% of any income on top of that. At the end of thirty years, any outstanding balance will be forgiven. This creates some odd incentives: if you expect to pay back your loan at some point, there is a reason to accelerate payment because the loans are (barely) interest-bearing; on the other hand, if you don’t think the minimum payments will end up repaying your loan, there’s absolutely no incentive to try to repay the loan, since it will eventually be forgiven anyway. In essence, for people in the latter group, these aren’t loans, but rather a 9% surtax on income over £21,000, which stays in place for 30 years.

Depending on whose estimates you’re using, it turns out that anywhere from 60 to 80% of present-day students are not expected to repay their loans (the range exists because, frankly, predicting repayment rates 30-years out is a bit tricky, and depends a lot on initial assumptions). As a matter of logic then, if you load more debt onto these people by replacing grants with loans, it simply isn’t going to be repaid – it’s going to wind up as forgiven debt sometime in the late 2040s. True, very poor students who end up among the wealthiest quartile of graduates will end up paying more, but for the most part this is just an accounting trick: the government is lending money to students now with the full intention of forgiving most it (with interest) in thirty years time.

Here’s the central dilemma: under the English loan system, raising student contributions is almost impossible unless you either change the repayment threshold, or you change the repayment rate. The problem is the Tories initially promised they wouldn’t do either of these things, so now they’re “examining” the weasel option of raising real contributions over time by de-indexing the £21,000 threshold. That will bring in more money, but it doesn’t change the reality that, in the main, this is just exchanging grants now, for loan forgiveness later.

If you’re in the looking-at-student-debt business in Canada, your data sources are limited. Provinces could publish their debt figures annually, but they don’t. Canada Student Loans does publish its debt numbers annually, but it includes nothing on provincial debt, so it’s not very useful. Statistics Canada surveys graduating students every five years, but only three years out from graduation, so the most recent data we have from that source is now five years old. Kinda sucks.

But there is one other source of data, at least for university graduates. That’s the triennial survey of graduating students from the Canadian University Survey Consortium, which just released its report on their 2015 data (Hey, Statscan! 17,000 responses, and a turnaround time of under four months!). This gives us a chance to see what’s been going on the last few years by comparing the 2102 and 2015 results.

Before I get into the results, a small caveat about the data. As its name implies, the consortium doesn’t have a fixed membership, and so comparability of results between surveys isn’t perfect. In 2012, 37 institutions participated (n= 15,111 students), and 34 in 2015 (n=18,114). Twenty-nine institutions did both surveys, but there was some churn. In terms of student numbers, the 2015 survey is biased slightly more heavily towards the Atlantic (17% vs. 13%), and less heavily towards Ontario (39% vs. 42%). Since the latter has been seeing lower average student debt of late because of its 30% tuition rebate program, one would expect a slight bias towards higher debt numbers in the 2015 survey. In both periods, the survey sample as a whole is overweight in the Atlantic, Saskatchewan, and Manitoba, and underweight in Quebec and Ontario.

Onwards. Here’s what happened to student debt incidence:

Figure 1: Percentage of Graduating Students With Debt, By Type of Debt

Not to beat around the bush: incidence is down. By four percentage points for family debt, three each for private bank debt and government debt, and a whopping nine percent for “any debt” (and, recall, this is with a population shift that is slightly more likely to have debt). For a three-year period, that’s a simply massive change, and one heading in the right direction.

Now, how about average debt levels?

Figure 2: Average Debt Levels (Among Those with Debt), by Source of Debt, in $2015

Here, we have trends going in different directions. Students are borrowing substantially less from family (for what that’s worth: in all likelihood, a substantial portion of these get forgiven), and marginally less from banks. But government borrowing is up 6% in real dollars, which more than offsets those changes. That’s a change for the worse, but it’s at least partially a product of a shifting survey base (my guess is that this accounts for about a quarter of this change). CUSC does not release data by region, but I think it’s pretty safe to say that the big increases will be found in Alberta, BC, and the Maritimes.

One of the things about student aid that makes it such great fun as a policy area is that it’s as much about framing as it is about actual policy. For instance, which of the following two policies would you like to have?

a) A policy where students are asked to bear a huge amount of debt – over $100,000 in some cases for an undergraduate degree – over 25 years, and where three-quarters of students will never repay their loans in full; or:

b) A policy where graduates are asked to pay a 9% surtax for 25 years, up to a maximum of about $100,000, but much less (possibly even $0) if their earnings are low.

If you’re a regular reader of the Guardian, you’ll probably recognize the first policy as being the one implemented by the Cameron government in 2012, to cover fees in English universities. That’s the one the progressive types are always pointing at and shouting: “Look! Students are being horribly indebted AND the government is losing lots of money through the program! Quelle fiasco!”

But here’s the thing: that second program is also the English loan scheme. As I’ve explained before, for the three-quarters or so of graduates not expected to pay off their loans in full, the scheme is simply a graduate tax. It’s not explained that way, but that’s what it is. It’s a packaging issue.

There’s something similar going on in student aid policy in the United States; namely, the interest in something called “Income Share Agreements”. It’s been kicking around for awhile (the American Enterprise Institute wrote about it a year ago), but is getting more of a hearing these days because Florida Senator, and potential Presidential candidate, Marco Rubio is now backing it. It’s basically a Human Capital Contract – someone gives you money today, and you agree to give them a set portion of your income for a set number of years.

If that sounds like a Graduate Tax, that’s because it’s exactly how a graduate tax works – the difference in this case simply being that you’re not giving that money to government, but rather to an individual who has chosen to “invest” in you. The beneficiary is different, but the flow of funds is precisely the same. But that difference is enough to get the idea some love from a Tea Party favourite.

And that is to say nothing of our experience in Canada where the CFS, which absolutely hates income-contingent loans, and has done so for years, applauded the introduction of the Repayment Assistance Program (RAP) – which basically makes the Canada Student Loans Program fully income-contingent – because the government simply chose not to call the program “income contingent”.

This all goes to show: in student aid, few people actually look at substance. The real debate is about the packaging.

There’s a trope out there that goes something like this: “Loans are unfair because interest on the loans means that needy students pay more in total to go to school than students who don’t need a loan“. If it were true, this would indeed be problematic. But the thing is, for the most part, it’s not.

Let’s follow two hypothetical students: Claudia and Eveline. Claudia can manage to pay $25,000 for her four years of tuition, upfront; Eveline cannot, and she borrows $25K from Canada Student Loans and her provincial student aid program over four years. Assume that inflation is a constant 2%, and that interest during the repayment period is 6.25% (over the last few years, real interest rates have floated between 400 and 450 basis points above inflation).

Student loans carry zero interest during the in-study period. This means students actually make money while they’re borrowing because inflation eats away at the value of the loan before they’re required to pay it back. In Eveline’s case, she effectively makes $1,125 between the September she starts and graduation day.

Then, of course, things start to work in the other direction. Assuming Eveline takes eight years to pay off her student loan, she ends up making $4,321 in interest payments (figure is net of inflation). Take away the $1,125 that Eveline “made” during the in-study period and the net interest cost comes to $3,196.

If that were the end of the story, the people who claim loans are “unfair” would be right; we would be discriminating against the poor. But that’s not the end of the story because people who get loans usually also get grants.

If you’re an independent student making less than $38K per year and you apply for aid, you are nailed-on for an extra $2,000 per year – that’s $8,000 over the course of a degree. Ditto if you’re a dependent student and your parents make less than $38K. If you’re a dependent student and your parents make less than (roughly) $76K, you’re nailed-on for another $800/month – or exactly $3,200 over four years, which wipes out the interest cost of the loan. Plus, of course, you get 15% of all interest paid as a tax credit – which means you actually come out ahead by a few hundred dollars.

Are there borrowers who don’t come out ahead? Yes. Those who borrowed but had family income high enough that they didn’t qualify for the middle-income grant likely wouldn’t receive a grant to offset the loan interest amount. Borrowers who take more than eight years might end up with higher interest charges not covered by their grants (and possible remission). There are enough variables here that it’s hard to say how many people this might include. But remember – the base population that doesn’t get sufficient offsetting grants consists of dependent students with family incomes over $80K, that’s *maybe* 20% of all borrowers (and not the poorest 20% by any means). Or to put it another way: probably something like 80% of borrowers are receiving more in subsidies than they pay in real interest over the life of their loan.

That’s a good thing – an outcome of our generous, if opaque, student aid system. We should acknowledge it, celebrate it, and most of all get the usual suspects who adore this talking point to shut up about it.

Stop me if you’ve heard this one before: it’s unfair that some people graduate with debt, and others don’t. The ones that do tend to have started off poorer to begin with. And so instead of being a means of social mobility, tuition ends up being a means of perpetuating it – the ones who start off poorer end up poorer. That’s bad, and that’s why we should have no tuition. Eliminate tuition and you eliminate inequality.

Second of all, while the notion that the poor are the ones with debt is mostly true, it’s not entirely so. Some well-off kids borrow – usually in their fifth year when their parents’ income no longer counts against them in the need assessment process. And some poorer kids get through without loans by working and living at home.

But the most important of all is a point articulated by the American writer Matt Bruenig in this article: eliminating tuition does not, in any way, change inequality between rich and poor students. To a large degree, the kids who graduate without debt do so because their parents pay their bills. If you make tuition free, it reduces (but does not eliminate) the need to borrow; it also means that wealthier parents get to save their money. The gap between rich parents and poor parents is not made narrower: they are both saving the same amount of money. And the idea that the gap between graduates is made narrower depends entirely on the notion that rich parents will look at all that money they’re saving and not pass it on to their kids.

Does anyone really believe that? Does anyone really believe that if rich parents had more money they’d pass less of it on to their kids? No? Then your argument relating tuition to the perpetuation of inequality is wrong.

Bruenig makes the argument – correctly – that if you are going to base your tuition policy around the idea that it should serve to reduce inequality (something many sensible people would think is nuts), then the only way to do that is by charging sharply progressive fees. Ask the kids from poorer families to pay little or nothing, and ask the kids from wealthier families to pay more. And in practice the way you do that is by charging high fees and off-setting it with need-based grants.

The National Graduates Survey figures on debt for the class of 2010 were (quietly) released yesterday. Unlike the employment data they released a few weeks ago, this data actually *is* comparable to results from previous surveys. It is thus a good way to check on whether/how student debt is actually reaching “out of sight” levels.

So, let’s start with some interprovincial comparisons.

Average Government Student Loan Debt at Graduation, Borrowers Only, By Province and Type of Institution, Class of 2010

The national average government debt among borrowers was $22,300 for university graduates, and $14,000 for college graduates. However, this conceals some pretty wild differences between provinces, especially at the university level where the provincial means extend from $11,900 in Quebec to $35,000 in New Brunswick. Of particular interest is the fact that Ontario, the province with the highest tuition, actually has among the lowest levels of debt (indeed, between 2000 and 2010, it fell nearly 17% in real terms).

Looking at the data over time, the next two figures show how government student loan debt has evolved:

Incidence and Mean Amount of Government Student Loan Debt at Graduation, College Borrowers Only, 1982-2010

The takeaway here: despite steadily rising tuition, the percentage of students taking out need-based loans to finance their education hit a thirty-year low in 2010. Debt was still high, but in real dollars was below where it was in 2000.

Now, while need-based government debt has been falling, non-need-based (or at least, not necessarily need-based) private debt has been rising. Private debt is a mish-mash of credit card debt (which most surveys suggest is pretty small), private bank loan debt, and debt to family members – the last of these is presumably fairly soft debt in the sense that it is available on highly negotiable terms and there is a reasonable chance of some form of debt forgiveness. Incidence of all forms of these debt combined has risen from 19% to 26% among bachelor’s graduates since 2010 (16 to 22% among college grads), and average debt from these sources (among those with any amount of such debt) has risen from $13,170 to $17,700 for bachelor’s graduates ($8,300 to $10,000 for college graduates).

It’s not clear what to make of the private debt figures. For the 15% of the student population that has both public and private debt, one assumes that the recourse to private debt is indicative that for this part of the student body, the existing student aid packages are inadequate. This is a group we should be pretty concerned about. As for the other 11% who only have private debt, it’s hard to say what the issue is. Why are they choosing private money over public money? Are they actually fairly well-off, and hence ineligible for aid? We simply don’t know.

In any case, as a result of this increase in non-public debt, total debt is up very slightly, as we see in the figure below. But while the averages of debt are up, the incidence is down – from 53% to 50% on the university side, and from 49% to 43% on the college side. And this, recall, in a period where participation rates were growing sharply.

Average Total Debt at Graduation, Borrowers Only, By Type of Institution, Classes of 2000, 2005 and 2010

So: government debt down, private debt up. Incidence of total debt down slightly, average debt up slightly. Any way you look at it, the basic picture on student debt is right where it’s been for the last decade. And meanwhile, interest rates have fallen, and after-tax incomes have risen.

I know facts never get in the way of a good story, but: There. Is. No. Crisis. Period.

As noted yesterday, graduate taxes and income-contingent loans have many similar features. They both defer payments until after graduation, and they are usually payable as a percentage of marginal income above a given threshold. In England right now, the payment scheme on ICR loans is that students pay 9% of whatever income they earn over £21,000 (roughly C$38,000). The difference between the two is that with a loan you have a set amount to pay, and when it’s paid you’re finished. With a graduate tax there is no principal, so you just keeping paying that fraction of your income for as long as the tax lasts.

That sounds like a simple and clear delineation, right? Well, here’s a twist: what if the loan were so big that you had no practical chance of ever paying it off at the set repayment rate? What would the difference between an ICR and a grad tax be then? The answer is: practically nothing – and that’s exactly where England finds itself right now.

Let’s step back a bit: in 2010, the UK government decided to let institutions charge tuition up to £9000. They also decided to allow students to borrow this amount for tuition (plus more, again, for living expenses) under the repayment scheme described above. When they did this, they were under the misapprehension that universities might actually try to compete for students on price, and hence assumed an average tuition of about £7000. Rather predictably, average tuition shot straight to £8500. As a result, it’s quite common for students to be borrowing £12-13,000 per year, or £36-39,000 for a degree (that’s C$66-72,000 – yes, really).

Crazy, right? Cue all the “intolerable debt burden” stuff. But wait: these loans aren’t like the ones we’re used to. Repayment is based on your income rather than size of debt – no graduate is ever required to pay more than 9% of their income over £21,000 in any given year, so the burden in any given year is pretty limited. And – here’s the kicker – the loan gets forgiven after 30 years. So, if you don’t finish paying, your obligation disappears without you having any debt overhang. Exactly like a Graduate Tax.

How many won’t pay it off? Well, these things are difficult to predict, but even over 30 years, paying 9% of your income over $38,000 isn’t likely to completely pay off very many of these loans. The government’s own financial forecasts are that 35-40% of the total net present value of the loans will have to be forgiven (others put it 8-10% higher). At a rough estimate, that probably means 70 to 80% of all borrowers will see some loan forgiveness.

At this point you start to wonder if debt numbers really matter in this system. Forget ICR: for most people, the current system is simply one in which government transfers billions of pounds in 2014 to institutions using student loans as a kind of voucher system, then turns a portion of those loans into student grants in 2044 via loan forgiveness. In the meantime, graduates pay a 9% surtax on income over £21,000.

You may have heard some rumblings from south of the border over the past few months with respect to a program called Pay It Forward (PIF). The brainchild of a student group called Students for Educational Debt Reform, this idea was picked up by the Oregon assembly last summer; within a few months, over a dozen state governments were examining similar draft legislation.

The basics of the program are these: instead of paying tuition, students agree to pay a percentage of their future income (the percentages vary by state – in Oregon it’s 0.75% per year of study) for 20 years after graduation. Some people mistook this for a version of income-contingent loans because it emphasized paying for school after-the-fact rather than up-front, and also because repayments were to be made as a function of income. But there’s one key difference. Loans have a limited liability: once you pay off the principal and interest, you’re done. With PIF, there is no principal – once you start paying into a hypothecated fund, destined for the state’s higher education institutions, you keep on paying for 20 years no matter what. This is formally known as a “graduate tax”.

Graduate taxes tend to be more progressive than income-contingent loans. If you’re at the bottom of the income scale, you probably come out better off – you simply never pay anything. If you’re at the top of the income scale, you’re likely going to pay a lot more because a portion of your income will go into public coffers long after you’d likely have paid off a loan. Interestingly, the famous Yale Tuition Postponement Option of the early 1970s (designed by Nobellist James Tobin, and used by Bill Clinton when he attended law school there) went off the rails for precisely this reason – the richer students got tired of paying for the poorer ones, and started making a fuss.

One downside to a graduate tax is that it’s harder to collect than a loan. In the US, for instance, it’s hard to imagine enforcing something like PIF, unless it was instituted nationally (if someone moved from Portland to Chicago, would Illinois be responsible for collecting the PIF contribution?). A graduate tax was in fact examined relatively thoroughly not once but twice in England (the 1997 Dearing Report and the 2005 fee reform), and was rejected precisely because of concerns about grads evading repayment through emigration.

Another downside is: where exactly does the money come from while you’re waiting for graduates to start earning money? If tuition is covering 40% of institutional expenditure, someone has to make that income good over the 20 or so years before the grad tax makes up the difference. It’s not clear who that might be; if the state had money to do this, it probably wouldn’t be faffing around with ideas like PIF. You could securitize the revenue stream, of course, but that also might get tricky. Income-contingent loans lack graduate taxes’ most potentially progressive features, but they do have the advantage of: a) being collectable, and b) producing income for institutions in the short term.

There is of course one country that is trying very hard to merge the ideas of ICR and graduate taxes, with some really odd results. More on the English experiment tomorrow.

So, the more stat-minded among you may have noted the release, this past Tuesday, of Statistics Canada’s 2012 Survey of Financial Security (SFS). Though the main talking points were largely about mortgage debt, it also contained some interesting statistics on student debt.

Now, remember that these are figures on outstanding student debt. Some of it will be in repayment (i.e. held by graduates now in the labour force), and some of it will not (i.e. held by current students). The way to think of these debt figures is as a collective portrait of people who borrowed in the decade or so prior to the snapshot, and who had not yet fully repaid their debt (because those who had successfully completed repayment would be out of the sample). So the 2012 figure for student debt is actually a collective picture of the outstanding debt of everyone who borrowed in the period 2002-2012, and who had not yet repaid, the 2005 figure covers the period 1995-2005 or so, etc., etc.

Anyways, the headline that the usual suspects would like you to focus on is the one about aggregate debt outstanding: $28 billion, up by $5.5 billion (23%) in real dollars since the last time the study was conducted, in 2005. Why is that a big deal? Because! $28 Billion! Big Number! But a slightly more intelligent look at the data shows a different story.

Figure 1 shows that the average outstanding student loan was about $15,000. That’s up about 6% from 2005, and 13% from 1999 (again, all figures are inflation-adjusted). Why is this figure so much smaller than the one for total debt? Simple: more people have outstanding student debt than in 2005, so it’s divided among a larger population. That might be because people are taking longer to repay their loans – more likely, though, it’s a reflection of the fact that student numbers as a whole rose substantially over the 00s.

Intriguingly, the data for median student debt (that is, the mid-point value, rather than the mean) tells a slightly different story, in that it fell 2% between 2005 and 2012 (though it has still risen a bit since 1999).

How should we interpret this? This isn’t the easiest data to unpack. It probably means, as I pointed out back here, that student debt hasn’t been increasing. But it also might mean that debt repayment rates have been increasing along with indebtedness, or (less likely) that a greater fraction of student loans are held by individuals who graduated from shorter programs.

Whatever the truth, what we do know for sure is that young people aren’t drowning in student loan debt. Among family units headed by people under-35, only a quarter hold a student loan, and the loan debt constitutes just 5.3% of their total debt, down from 6.7% in 2005. Whatever the effects of student borrowing is, it would appear that deterring graduates from taking on ever-larger mortgages isn’t one of them.

Yesterday, we discussed why student debt burdens were falling. One of the key ingredients in that recipe was that student debt had remained stable, or even fallen, over the last decade or so. This is a puzzling piece for many because it seems counterintuitive. So what’s going on?

Well, costs are increasing, but only modestly so: since 2000, tuition has only been rising about 2% above inflation. There’s been no real change in the percentage of students living away from home – and for those who do live away from home, the picture is mixed: students in Western Canada are paying a lot more than they did 10 years ago; students in Ontario, on the whole, tend to be paying less. Nationally, it mostly evens out. Given these changes in costs, one would expect modest but noticeable increases in borrowing, ceteris paribus. So something else must have changed in order to offset this. But what?

Is it a question of students themselves having more resources? Probably not. As Figure 1 shows, student employment is remarkably stable over time. So, too, is their average hourly income from wages, which surveys show is almost always 20-30% above minimum wage.

Figure 1: Student Employment Patterns, Canada, 1997-8 to 2009-10

What about money from parents? This seems to be up a little bit: average transfer in 2001-2 was about $2000 (in $2011), and is now about $2500. What has changed, however, is the amount of money students get through RESPs. This was negligible ten years ago; now, roughly 30% of students receive money from this source, and it’s a significant amount, too ($4,000/year, on average). Obviously, much of that’s going to students who aren’t on student aid, but for those who are, it’s more than enough to explain the slowing rise in debt.

Then there’s the rise in student assistance. Institutions have massively increased their scholarship budgets. In the 1990s, about one in three new students got some kind of entrance scholarship. Now it’s two in three. The total amount spent on grants and remissions by provincial and federal governments jumped from $600 million/year in 1995, to almost $1.8 billion in 2010 (both figures in $2011 real dollars). And of course, governments have added an extra $1.5 billion in tax credits. Not all of that ends up in students’ pockets (some ends up with parents, some gets deferred until after graduation), but enough does to take a bite out of rising costs.

None of these, on its own, amounts to a silver bullet to explain why student debt is stable or falling. But together, it’s easy to see: more grants, more tax credits, the creation of the RESP are, together, probably putting about $3 billion extra into students’ hands every year. Call it about $3,000 per year, per student. Then add institutional aid, and throw in the extra billion or so that has gone to grad student funding in the past fifteen years. That brings us to about $4,000 extra, per student. That’s more than enough to explain why debt isn’t increasing.